29 Dec Economics assignment

Economics Homework

Economics assignment

1. If the U.S. dollar-British pound exchange rate is $1.50 per pound, and the U.S. dollar-euro rate is $0.90 per euro:

a. What is the pound-per-euro rate? (10 points)

b. How could you profit if the pound-per-euro rate were above the rate you calculated in part a? What if it were lower? (10 points)

2. What does the theory of purchasing power parity predict in the long run regarding the inflation rate of a country that fixes its exchange rate to the U.S. dollar?

3. Can purchasing power parity help predict short-term movements in exchange rates?

4. Suppose that the Chinese central bank has been intervening in the foreign exchange market, buying U.S. dollars in an effort to keep its own currency, the yuan, weak.

Use the model of demand and supply for dollars to show what the immediate effect would be on the Chinese yuan- U.S. dollar exchange rate of a decision by China to allow its currency to float freely.

Either provide a graph or a specific description of the graph to illustrate your answer.

5. Consider again the situation described in Question 4 where China decided to allow its currency (the renminbi) to float. What would you expect to happen to

a. U.S. exports to China? (10 points)

b. U.S. imports from China? (10 points)